2024 BTC Halving Preview: Bullish in the Long Term, but Is It Worth Trading Now?
Original author: Rick Maeda
Original translation: TechFlow
Abstract
On the surface, the much-anticipated halving in the Bitcoin network has historically been bullish.
However, given the number of halvings that have occurred historically, and taking a closer look at BTC’s performance in the context of the overall market, it is difficult to make any highly definitive judgments based solely on the halving event itself.
Overall, the Bitcoin halving may not be a tradable event, but it is structurally bullish from a supply perspective. With the right macro tailwinds, BTC could rise again after the halving.
The consensus regarding the Bitcoin halving is that it is bullish, with the general belief being that it is a tradable event. But is this really the case? In this article, we delve into past halving events and look at supply and macro data for the upcoming 2024 halving to gain a deeper understanding of what this pre-announced event means for investors.
What is Bitcoin Halving?
The halving is a pre-programmed event in the Bitcoin network that cuts the reward for Bitcoin miners in half (see below for more on what this means). It is an important mechanism in Bitcoin’s monetary policy, ensuring that only 21 million BTC will ever be in circulation, as well as preventing inflation because it reduces the rate at which new BTC are created.
This pre-programmed update occurs every 210,000 blocks, which roughly translates to once every four years, with the next estimated to be April 20, 2024. When Bitcoin launched in 2009, the mining reward was set at 50 BTC, and after three halvings (2012, 2016, and 2020), the reward will soon drop to 3.125 BTC per block.
Bitcoin uses a Proof of Work (PoW) consensus mechanism to verify and secure transactions on the blockchain. In PoW, miners compete to solve complex math problems, and the first miner to solve the problem correctly will be able to add the next block of transactions to the blockchain. For verifying transactions and adding blocks to the blockchain, the winning miner will receive newly created Bitcoins as a reward, and this reward is "halved" in the halving.
The reality of historical halving
On the surface, the halving is proving to be extremely bullish for BTC.
Figure 1 below shows the historical price action of BTC before and after each previous halving date, from one year before to one year after. The red dotted line shows the volume-weighted average of past halvings, while the black line shows the current BTC path.
Figure 1: Halving is bullish for BTC
Figure 2 below shows the performance of Bitcoin halving in a tabular form.
Figure 2: Bitcoin’s performance around the halving
Since the upcoming halving is scheduled for 20 April 24, we extrapolated the prices in recent days by using the latest price data from 17 April 24.
The log-scale y-axis of Figure 1 suggests that the halving is a bullish catalyst, but considering we only have three observations, the first when BTC was only $12.80, and the third in May 2020 when all risk assets surged in the Covid rally, any interpretation of the data needs to be treated with caution. Furthermore, when we look at the average 1-year return of BTC since mid-2011, with the exception of the first halving in 2012, the returns 1 year after the halving do not look impressive.
Here, the 2020 halving raises an interesting question about how global markets in general will perform. In Figure 3 below, we replicate Figure 2, using stocks, specifically the S&P 500, as a benchmark for risk assets:
Figure 3: Performance of the S&P 500 before and after the halving
The SPX has an average 1-year rolling return of +11.42% (since mid-July 2011, which matches the historical price data we have for BTC), while its average 1-year performance since the Bitcoin halving is over +27%, or more than double the average! This highlights an important reality that the popular narrative is often happy to ignore. Just as we wouldn’t conclude “So the programming update in the Bitcoin network that cut the reward for miners in half is very bullish on the S&P 500,” we probably can’t draw true conclusions from Bitcoin’s past performance. Otherwise, by some measure, such as the hit rate of outperformance, you could even conclude that the Bitcoin halving is more bullish for the SPX than it is for Bitcoin itself!
For those interested in volatility, there is no clear relationship with the halving date or period. Figure 4 examines realized volatility 30 days before and after the halving date:
Figure 4: BTC volatility has no pattern
2024 Halving Theme
1: Long-term holders
Here we look at the total amount of BTC held by long-term holders, adjusted for BTC’s supply. Given that BTC’s circulating supply will increase before the hard-coded 21 million Bitcoin cap is reached, we divide the amount held by long-term holders by the circulating supply at the time to look at the percentage of holdings:
Figure 5: Bitcoin held by “long-term holders”
Although less pronounced in 2020, Figure 5 suggests that long-term holders may be taking profits ahead of the halving, with a decline also seen in 2024. This selling dynamic is often attributed to miners; since the halving essentially reduces revenue per block by 50%, miners often sell a portion of their reserves when rewards decrease in order to upgrade their hardware to mine more efficiently when rewards decrease. Since we are only days away from the 2024 halving, this structural selling pressure may be occurring.
2: Exchange BTC balance
While exchanges don’t make directional bets, we still look to see if there are any patterns in exchanges’ reserve holdings (and by extension, potentially their internal market makers) around halving dates:
Figure 6: Bitcoin held on cryptocurrency exchanges
Nothing interesting can be seen in Figure 6 related to the halving. The only observable trend is a longer term one, with exchange balances experiencing about 6 years of accumulation, with balances steadily declining since the start of the previous bull run.
3: Macro Background
The relevance of macro conditions to Bitcoin is often debated, but macro cycles, especially USD liquidity (as a function of monetary policy/interest rates, risk appetite, etc.) remain the driving force of asset prices in the medium to long term. With this in mind, we focus on what the market is pricing in for the Fed Funds rate 12 months into the future on the halving date.
Figure 7: The Fed at the time of the halving
It is clear that the upcoming 2024 halving is an outlier, with almost 3 rate cuts expected.
Lower interest rates are generally bullish for risk assets, but what matters for price action is often not the rate that is priced in, but how far it deviates from market expectations, whether it is inflation data or a statement from the Fed Chair. In Figure 8, we compare the actual settlement implied rate to market expectations on each halving date to see how accurate the forward pricing in Figure 7 is.
Figure 8: Accuracy of Fed Expectations
The data for 2012 and 2020 are fairly ordinary, with no more than 10 basis points away from the initially expected range, but 2016 is worth examining because of two Fed rate hikes, which were not yet priced in at the time of the second halving. Interestingly, Figures 1 and 2 show that the 12 months following the 2016 halving was BTC’s worst performance of the three prior halvings, and the only time it performed below the 1-year average return. So with more than two rate adjustments today for the next 12 months, a more important driver for BTC post-halving could be ongoing inflation in the US, or anything else that might encourage the Fed to stay the course rather than cut rates.
in conclusion
We briefly explored the unique macro context of the upcoming halving, but there are other considerations not mentioned in this report, primarily around the recent spot BTC ETF launch. Given all the attention BTC has received recently, this is definitely the most anticipated halving to date, and the general institutionalization of BTC introduces new players that could change the dynamics of supply, demand, and price action. It’s worth noting here that the newly launched ETF holds over 4.1% of BTC’s circulating supply, while MicroStrategy owns over 1%. Given that there have only been three halvings before, drawing statistically significant conclusions from past performance to determine if this is a tradable event is difficult. But structurally, this is undoubtedly a bullish event from a supply perspective.
